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What type of loan is used for buying land?

For lenders, land loans are riskier because the loan’s collateral, the property, isn’t being used for housing, at least in the near term. That makes it easier for an owner to walk away and leave the lender stuck with the land. Because of that risk, down payments and interest rates are higher for land loans than they are for mortgage loans.

The type of loan you obtain depends on the property, your plans for the land and the timing of construction. Even if you plan construction right away, make sure that the property is legally available for your planned use.

Check with local officials about zoning. If you want to build in an area not zoned for development, you will need to seek a zoning change. Once you are confident the land can be used as you plan, that is when you seek financing.

A raw land loan will have a higher down payment requirement and a higher interest rate than an improved property loan. A local lender that is familiar with the property may be more willing to work with you than a lender unfamiliar with the area. Many lenders treat raw, unimproved land loans as commercial loans. If that’s the case with the property you want to buy, the repayment terms, how the interest is calculated and other lending terms will vary from those in a residential real estate loan.

Improved property, zoned for an intended use, will be easier to get a loan for than unimproved property. Land bought with immediate plans for construction is the easiest type of land loan to secure because the lender will be paid off when a mortgage is obtained on the structure. Beyond home equity loans, here’s a list of other options you can consider.

* Seller financing: If you are ready to build, the seller many be able to offer short-term financing. This often happens when builders purchase lots. If you do choose this path, have an attorney represent you.

* Credit unions: Credit unions often offer competitive rates, but expect them to limit the size of land financed.

Getting loans on land without a plan will be difficult. Land loans are “story loans,” meaning the lenders will need to understand the story behind the property, including your plans, before they will be willing to lend. A final option to consider is to work with a mortgage broker.

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